Exam 13: Short-Run Decision Making: Relevant Costing

Tine Company makes carpets. A customer wants to place a special order for 1,000 carpets in navy blue with the company logo woven in the middle, to be priced at $30 each. Normally, Tine would charge $60 per carpet for this type of order. Tine figures that yarn and backing will cost $12 per carpet, variable overhead (machining, electricity) is $5 per carpet, direct labour is $10 per carpet, and one setup will be required at $800 per setup. The setup charge costs are 100% labour. Currently, the workers needed to set up and make the carpets are working at Tine. Their wages will be paid whether or not the special order is accepted. Tine's policy is to avoid layoffs to the extent possible. -Refer to the Figure.Which of the following is a qualitative factor that Tine would consider when making the decision to accept or reject the special order?

Alpha Company produces two models of a component: Model K-3 and Model P-4. The unit contribution margin for Model K-3 is $6, and the unit contribution margin for Model P-4 is $14. Each model must spend time on a special machine. The firm owns two machines that together provide 4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4 requires 30 minutes of machine time. -Refer to the Figure.Suppose Alpha Company can sell only 5,500 units of each model.How many units of Model K-3 should be produced?

A choice between internal and external production is a make-or-buy decision.

Alora Company produces a product that has a manufacturing cost of $40 per unit.Alora's policy is to charge a price equal to cost plus $25%.The 25% is pure profit to Alora.

Information about three joint products follows: The cost of the joint process is $60,000.Which of the joint products should be sold at split-off? A B C Anticipated production 5,000 1,000 2,000 Selling price/kg at split-off \ 10 \ 30 \ 16 Additional processing costs/kg after split-off (all variable) \ 6 \ 12 \ 24 Selling price/kg after further processing \ 20 \ 40 \ 50

Andrews Industries manufactures 10,000 components per year.The manufacturing cost of the components was determined as follows: If the component is not produced by Andrews,inspection of products and provision of power costs will be only 10% of the production costs,moving materials costs and setting up equipment costs will be only 50% of the production costs,and supervision costs will amount to only 40% of the production amount.An outside supplier has offered to sell the component for $45.Suppose Andrews Industries purchases the component from the outside supplier.What will be the effect on Andrew's income? Direct materials \ 140,000 Direct labour 230,000 Inspecting products 50,000 Providing power 20,000 Providing supervision 30,000 Setting up equipment 50,000 Moving materials 10,000 Total \ 530,000

A segment margin is always greater than or equal to zero.

When multiple constraints are present,which of the following mathematical techniques is used to solve the product mix problem?

Butry Company manufactures veterinary products. One joint process involves refining a chemical (dactylyte) into two chemicals: dac and tyl. One batch of 5,000 L of dactylyte can be converted to 2,000 L of dac and 3,000 L of tyl at a total joint processing cost of $12,000. At the split-off point, dac can be sold for $3 per litre and tyl can be sold for $4 per litre. Butry has just learned of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 L of prodac for every 2,000 L of dac. Prodac sells for $5 per litre. -Refer to the Figure.Should Butry process dac further or sell now,and what will be the effect on income?

"The accounting decision-making model is not useful in real life because it only looks at the numbers." Critique this statement,and give an example for which it does not hold true.

Canning Company uses a joint process to produce products W,X,Y,and Z.Each product may be sold at its split-off point or processed further.Additional processing costs of specific products are entirely variable.Joint processing costs for a single batch of joint products are $120,000.Other relevant data are as follows: Which of the following actions should be taken by Canning? Sales Value Additional Sales Value of Product at Split-Off Processing Costs Final Product W \ 40,000 \ 60,000 \ 80,000 X \1 2,000 \ 4,000 \ 20,000 Y \ 20,000 \ 32,000 \ 120,000 Z \ 28,000 \ 20,000 \ 32,000 \ 100,000 \ 116,000 \ 252,000

Match each statement with the correct item below. -Opportunity cost

What kind of decision focuses on whether a one-off order should be accepted or rejected?

ProPrinters uses part 87A in the production of colour printers. Unit manufacturing costs of part 87A are as follows: ProPrinters uses 100,000 units of 87A per year. Printers R Us has offered to sell ProPrinters 100,000 units of 87A per year for $12. Fixed overhead is unavoidable. Direct materials \ 8 Direct labour 2 Variable overhead 1 Fixed overhead 4 -Refer to the Figure.Which of the following is a qualitative factor that would NOT affect ProPrinters'decision?

All fixed costs are always relevant.

The operations of Smits Corporation are divided into the Childs Division and the Jackson Division.Projections for the next year are as follows: Suppose the Jackson Division were dropped.What would be the operating income for Smits Corporation? $\begin{array}{lrrr}&\text { Childs } & \text { Jackson } & \\&\text { Division } & \text { Division } & \text { Total }\\\text { Sales } & \$ 250,000 & \$ 180,000 & \$ 430,000 \\\text { Variable costs } & 90,000 & 100,000 & 190,000\\\text { Contribution margin } & \$ 160,000 & \$ 80,000 & \$ 240,000 \\\text { Direct fixed costs } & 75,000 & 62,500 & 137,500 \\\text { Segment margin } & \$ 85,000 & \$ 17,500 & \$ 102,500 \\\text { Allocated common costs } & 35,000 & 27,500 & 62,500 \\\text { Operating income (loss) } & \$ 50,000 & \$(10,000) & \$ 40,000\end{array}$

Which of the following is an important qualitative factor to consider regarding a special order?

The following information pertains to Erickson Company's three products: Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.What would be the effect on annual profits? $\begin{array}{lrrr}&A&B&C\\\text { Unit sales per year } & \underline{250} & \underline{400} & \underline{250} \\\text { Selling price per unit } & \$ 9.00 & \$ 12.00 & \$ 9.00 \\\text { Variable costs per unit } & \underline{3.60} & \underline{9.00} & 9.90 \\\text { Unit contribution margin } & \$ 5.40 & \$ 3.00 & \$(0.90) \\\text { Contribution margin ratio } & 60 \% & 25 \% & (10) \%\end{array}$

Match each statement with the correct item below. -Sell-or-process-further decision

Elco Oil Products manufactures three joint products: Phase 1,Phase 2,and Phase 3.The cost of the joint process is $30,000.Information about the three products follows: Required: Phase 1 Phase 2 Phase 3 Anticipated production 5,600 10,000 2,500 Selling price/kg at split-off \ 2.00 \ 1.00 \ 3.00 Additional processing costs / after split-off (all variable) \ 1.50 \ 1.25 \ .75 Selling price/kg after further processing \ 2.50 \ 3.75 \ 6.25 Allocated joint costs \ 12,000 \ 10,500 \ 7,500 A. Determine whether each product should be sold at split-off or processed further. B. Determine the firm's income if the firm processed all three products beyond split-off.